With the 2015 Canadian Federal budget, the minimum payout rates for Registered Retirement Income Funds (RRIF) have been reduced significantly. If you only withdraw this amount each year you might have a much larger capital than you expect when you reach your 90s. If you do not want so much left as an inheritance with the resulting large income taxes you may want to increase your withdrawals.
The April 21 budget lowers the minimum payouts. The 2015 RRIF payout preserves capital a lot longer as shown in the accompanying charts that come from RRIF Minimum Payout – 2015 versus Old Rates. For example, at age 92 and an interest rate of 5%, there is still 50% of your capital left compared to only 32% for the old rates. This means that if you started with $100,000 at age 71 your estate would be liable for taxes on $50K instead of $32K. Depending on your marginal tax rate this could be a significant loss. If you live in Ontario and have an income of from $43K to $80K, your marginal rate will be 31.15%. (These values come from Canadian Marginal Tax Rates – 2014.) You would lose $15,575 compared to $9,968 with the old payout rates.
If this concerns you, you need to begin setting your withdrawals to reduce the capital remaining. You can easily do this by using the spreadsheet associated with Setting TFSA and RRIF Withdrawals. The charts below use the spreadsheet with $100K starting at age 71, no inflation, payouts at the end of the year and interest of 5%.
The first chart shows the withdrawals and the capital when the mandatory minimum payouts are used. The withdrawals start at $5,280 and go to $7,996 at age 92 (for an average of $6,547), when the capital is $50,260.
You might wonder whether this is worth doing. The following is a little complex so I hope you can follow it.
The total withdrawals of $7,590 per year are $167K (7.59 x 22 years). Using the tables on the spreadsheet, the cumulative withdrawals for the minimum payouts are $144K from age 71 to 92. The difference is $23K.
This extra income will be offset by the remaining $50K of capital using the minimum payout.
The result is that you can have an additional $23K over 22 years or you can add $50K to your estate. You will be better off by $27K with the second option.
However, this does not take into account any income taxes. The $23K represents an average of $1K each year that will be taxed at your marginal tax rate. But, the $50K of capital is also taxed and your marginal tax rate may be higher if all of your assets force your income into a higher tax bracket where it could exceed 40%. If the marginal tax rates are the same during your lifetime and at age 92, using the minimum payout would leave you ahead by $18.6K, which is a significant amount [ (50-23) x (1-.3115) ].
These numbers change with any change to the interest rate and the withdrawal amounts. You can easily do the above analysis yourself using the tables for any new values you enter. As shown in the example below, this advantage drops as the interest rate drops.
Here is the process to follow:
(1) Enter your age, inflation rate, start of payouts, RRIF capital and interest rate.
(2) For minimum payout:
- (2.1) Leave the RRIF Min Fixed Withdrawal/Yr blank.
- (2.2) For the age you want to use, scroll down to find it in the table. Then scroll over to the RRIF Cum Withdrawal column and record the value you find.
- (2.3) Record the value of the RRIF Capital.
- (2.4) Record the value of the RRIF Avg Withdrawal.
(3) For fixed withdrawal:
- (3.1) Enter values into RRIF Min Fixed Withdrawal/Yr until you get the RRIF Capital to go to zero at the age you have selected. Record the value.
- (3.2) Record the value of the RRIF Cum Withdrawal for the age when the capital goes to zero, or when the last full withdrawal is taken.
With these values, you can now compare taking a fixed withdrawal to having capital remaining as follows:
(4) Withdrawal Difference = (3.2) – (2.2)
(5) Remaining Capital less Withdrawal Difference = (2.3) – (4)
In most cases (5) will be positive. If small, it might make sense to used a fixed withdrawal.
As an example of using the above, using the above values but a 2.5% interest:
- (2.2) Minimum payout RRIF Cum Withdrawal = $109K
- (2.3) Minimum payout RRIF Capital = $28K
- (2.4) Minimum payout RRIF Avg Withdrawal = $4,961
- (3.1) RRIF Min Fixed Withdrawal/Yr = $5,900
- (3.2) RRIF Min Fixed Withdrawal Cum Withdrawal = $130K
- (4) Withdrawal Difference = (3.2) – (2.2) = 130 – 109 = $21K
- (5) Remaining Capital – Withdrawal Difference = (2.3) – (4) = 28 – 21 = $7K
In this case, the difference is only $7K (compared to $27K for 5% interest). Thus it may make sense to take a fixed withdrawal for a low interest rate and the minimum payout for high interest rates.
Keep in mind that with a fixed withdrawal your income stops completely at the age you selected. If you do not want to take this risk, use the minimum payout option.
Only you can decide what to do, but at least you now know the tradeoff and how to do the comparison.